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5 Legal Tips When Buying a Franchise

By Andrew Lu on January 17, 2013 | Last updated on March 21, 2019

Buying a franchise may seem like a great idea. After all, you're buying into a business that is presumably already established and has a recognizable customer base.

So by paying the franchise fee, you can avoid a lot of the problems that come with starting a business like letting customers know what your business is about, deciding what goods to carry, and even knowing where to get your supplies.

However, buying a franchise is not for everyone -- the entrepreneurial landscape is filled with failed and disgruntled former franchise owners. So before rushing out and buying a franchise, you may want to keep these five legal tips handy:

  1. Read the contract carefully. A franchise contract sets out all the terms and obligations of your franchise relationship. Some contracts can be very strict and limit everything from the types of napkins you use to the number of pickles that go in a bun. Other contracts provide more leeway and really only license out the name of the company. Read the contract carefully and know what you are getting into before signing the deal.

  2. Watch out for hidden costs. The initial franchise fee is rarely ever the only fee you'll need to pay to open a franchise. Be aware that new franchisees may also need to pay rent, outfit a place of business, purchase initial inventory, and acquire licenses and insurance.

  3. Know the market. When you purchase a franchise, you may assume that the franchisor is only selling a franchise to you in a particular area. However, you cannot take this for granted, and you will want to make sure that the franchisor won't also license another franchise across the street from you.

  4. Consider the franchisor's financial history. Looking into the past may tell you what to expect in the future. Take a good look at the financial disclosure documents of the franchisor and determine whether or not the franchise is a risky investment. Focus on growth patterns and evaluate how the franchisor makes its money.

  5. Hire a lawyer. Entering into a franchise agreement is a serious legal commitment. If you are not familiar with reading and understanding business contracts, you may want to hire a small business attorney to guide you through the process.

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